Knoll, Inc. (KNL), a leading designer and manufacturer of furnishings and coverings for the workplace and home, today announced results for the fourth quarter and year ended December 31, 2017. Net sales were $316.1 million for the fourth quarter, an increase of 7.9%, from the fourth quarter of 2016. Operating profit for the quarter was $12.6 million, a decrease of 64.8% when compared to operating profit of $35.8 million for the fourth quarter of 2016. Adjusted operating profit was $31.6 million, a decrease of 11.7% when compared to adjusted operating profit of $35.8 million in the fourth quarter of 2016. Net earnings for the fourth quarter of 2017 were $32.7 million, an increase of 52.4% when compared to the fourth quarter of 2016. Adjusted net earnings for the fourth quarter of 2017 were $17.6 million, a decrease of 17.8% when compared to the fourth quarter of 2016. Adjusted EBITDA was $41.0 million for the fourth quarter, a decrease of 8.7% when compared to $44.9 million in the fourth quarter of 2016. Diluted earnings per share was $0.67 and $0.44 for the fourth quarter of 2017 and 2016, respectively. The fourth quarter diluted earnings per share was heavily impacted by the changes in tax law, offset by asset impairment, pension settlement, and acquisition charges. Adjusted diluted earnings per share was $0.36 and $0.44 for the fourth quarter of 2017 and 2016, respectively.
Net sales were $1,132.9 million for the year ended December 31, 2017, a decrease of 2.7% from 2016. Operating profit for the year decreased 35.5% to $88.0 million, compared to operating profit of $136.3 million for the year ended December 31, 2016. Adjusted operating profit was $109.2 million, a decrease of 19.9% when compared to adjusted operating profit of $136.3 million in 2016. Net earnings for 2017 were $80.2 million, a decrease of 2.3% when compared to 2016. Adjusted net earnings for 2017 were $68.0 million, a decrease of 17.2%, when compared to 2016. Adjusted EBITDA was $144.5 million for 2017, a decrease of 14.3% when compared to $168.7 million in 2016. Diluted earnings per share was $1.63 and $1.68 for the year ended December 31, 2017 and 2016, respectively. Adjusted diluted earnings per share was $1.38 and $1.68 for the years ended December 31, 2017 and 2016, respectively.
During the first quarter of 2018, the Company completed the acquisition of Muuto A.P.S. ("Muuto"), the Copenhagen-based designer and provider of affordable luxury furniture, lighting and accessories for the workplace and home, for approximately $300.0 million in cash, less certain customary adjustments. Concurrent with the Muuto acquisition, the Company amended its credit facility, which provides for a $750.0 million credit facility that matures in five years, consisting of a revolving commitment of $400.0 million, a US term loan commitment of $250.0 million and a multi-currency term loan commitment of €81.7 million. The proceeds of the credit facility were used to fund the Muuto acquisition, refinance certain indebtedness and for ongoing working capital requirements.
Andrew Cogan, President and CEO, stated, “2017 was an important rebuilding year for Knoll as we made fundamental investments across our residential and commercial businesses. In particular, adjustments to our go to market strategy and product portfolio in our Office segment responded to rapidly changing market conditions. The return to growth that we delivered in the fourth quarter demonstrates the traction we believe we are gaining in our core markets and bodes well for the year ahead. With the Muuto acquisition now closed, and integration with our North American sales teams well underway, our momentum in the market should build."
“While in the short term these investments dampened our profitability, we believe in the year ahead the combination of continued growth, a plateauing of the ramp up in investment spending, our lean initiatives, and a significantly lower tax rate, should lead to meaningful earnings per share growth,” he added.
Fourth Quarter Results
Fourth quarter 2017 financial results highlights are as follows:
(1) For a reconciliation of Non-GAAP financial measures, see “Reconciliation of Non-GAAP Financial Measures” below.
Net sales were $316.1 million for the fourth quarter of 2017, an increase of 7.9%, from the fourth quarter of 2016. Net sales for the Office segment were $198.9 million for the fourth quarter of 2017, an increase of 9.9%. The increase in the Office segment was due primarily to strong growth in the commercial business compared to the fourth quarter of 2016. New workplace platforms and complimentary products drove sales growth, partially offset by a modest decline in legacy system sales. Net sales for the Studio segment were $90.7 million for the fourth quarter of 2017, an increase of 8.7%. The increase in the Studio segment was led by growth in both the contract and residential markets at Knoll Europe, and gains at HOLLY HUNT. Net sales for the Coverings segment were $26.5 million for the fourth quarter of 2017, a decrease of 6.9%. The decrease in the Coverings segment was due primarily to fewer large project opportunities.
Gross profit for the fourth quarter of 2017 was $112.3 million, an increase of $1.0 million, or 0.9%, when compared with the fourth quarter of 2016. Gross margin decreased from 38.0% in the fourth quarter of 2016, to 35.5% for the fourth quarter of 2017. The decrease was due primarily to unfavorable net price realization and accelerated commodity inflation in the Office segment, partially offset by higher sales volume.
Operating expenses were $99.7 million for the fourth quarter of 2017, or 31.6% of net sales, compared to $75.6 million, or 25.8% of net sales, for the fourth quarter of 2016. Operating expenses in the fourth quarter of 2017 included an asset impairment charge of $16.3 million, a pension settlement charge of $2.2 million, and acquisition costs of $0.5 million. The asset impairment charge related to the write-off of capitalized software costs, previously included in construction in progress, and was a result of the global design review of the next phases of our enterprise resource planning system implementation. The pension settlement charge was related to cash payments from lump sum elections made by employees affected by the restructuring activities in the second quarter of 2017. Excluding these items, adjusted operating expenses were $80.7 million for the fourth quarter of 2017, or 25.5% of net sales compared to $75.6 million for the fourth quarter of 2016. The increase in adjusted operating expenses was related primarily to the expansion of our sales force and higher incentive compensation compared to the fourth quarter of 2016.
During the fourth quarter of 2017, other expense was $0.6 million compared to other income of $0.1 million for the fourth quarter of 2016. Other income and expense was related to the impact of exchange rate fluctuations on our foreign subsidiaries.
Net earnings for the fourth quarter of 2017 was $32.7 million, or $0.67 diluted earnings per share, compared to $21.4 million, or $0.44 diluted earnings per share, for the fourth quarter of 2016. Net earnings for the fourth quarter of 2017 included a $26.6 million one-time benefit, primarily related to the re-measurement of the Company's net deferred tax liabilities at the new corporate income tax rate of 21% in response to the passage of the U.S. Tax Cuts and Jobs Act ("Tax Reform"). This amount is an estimate based on the facts and circumstances at year end and may be subject to further refinement during the applicable measurement period. Net earnings for the fourth quarter of 2017 also included non-recurring asset impairment, pension settlement, and acquisition charges. Excluding the impact of Tax Reform and these non-recurring operating expenses, adjusted net earnings for the fourth quarter of 2017 was $17.6 million, or $0.36 adjusted diluted earnings per share, compared to $21.4 million, or $0.44 adjusted diluted earnings per share, for the fourth quarter of 2016.
The effective tax rate for the fourth quarter of 2017 was (227.6)% compared to 38.1% for the fourth quarter of 2016. Excluding the impact of Tax Reform, the effective tax rate for the fourth quarter of 2017 would have been 39.2%, compared to 38.1% for the fourth quarter of 2016. The mix of pretax income and the varying effective tax rates in the countries and states in which we operate directly affects our consolidated effective tax rate.
Capital expenditures for the fourth quarter of 2017 totaled $11.1 million compared to $14.7 million in the fourth quarter of 2016. The Company paid a quarterly dividend of $7.3 million, or $0.15 per share, in the fourth quarter of 2017 and 2016.
Full Year Results
Full year 2017 financial results highlights are as follows:
(1) For a reconciliation of Non-GAAP financial measures, see “Reconciliation of Non-GAAP Financial Measures” below.
Net sales were $1,132.9 million for the year ended 2017, a decrease of 2.7% from 2016. Net sales for the Office segment were $682.9 million in 2017, a decrease of 6.6% from 2016. The decrease in the Office segment was due to declines in both government and commercial sales, primarily in the first half of the year. Net sales for the Studio segment were $341.0 million in 2017, an increase of 5.4%. The increase in the Studio segment was due primarily to growth from HOLLY HUNT and Knoll Europe, as well as incremental sales from a full year of DatesWeiser acquired in December of 2016. Net sales for the Coverings segment were $109.0 million in 2017, a decrease of 0.5%. Continued year-over-year growth in Spinneybeck | FilzFelt sales, particularly in the architectural application space, was offset by lower volume at KnollTextiles and Edelman.
Gross profit for 2017 was $414.6 million, a decrease of $31.4 million, or 7.0%, when compared with 2016. During 2017, gross margin decreased to 36.6% from 38.3% in 2016. This decrease was driven by the Office segment where fixed-cost leverage was impacted by lower volume combined with commodity inflation.
Operating expenses were $326.6 million in 2017, or 28.8% of net sales, compared to $309.7 million, or 26.6% of net sales in 2016. Operating expenses for 2017 includes an asset impairment charge of $16.3 million, a pension settlement charge of $2.2 million, restructuring charges of $2.2 million, and acquisition costs of $0.5 million. Excluding these items, adjusted operating expenses were $305.4 million, or 27.0% of sales, for 2017, compared to $309.7 million for 2016. The decrease in adjusted operating expenses was primarily related to reduced incentive compensation due to decreased profitability, partially offset by increased sales headcount.
During 2017, other expense was $1.9 million compared to $3.4 million in 2016. Other expense was related primarily to foreign exchange losses that resulted from the revaluation of intercompany balances between our US and foreign entities in both 2017 and 2016.
Net earnings for 2017 was $80.2 million, or $1.63 diluted earnings per share, compared to $82.1 million, or $1.68 diluted earnings per share for 2016. Net earnings for 2017 included a $26.6 million one-time benefit stemming from Tax Reform. This is amount is an estimate based on the facts and circumstances at year end and may be subject to further refinement during the applicable measurement period. Excluding the impact of Tax Reform and certain operating expenses mentioned in the full year operating expense discussion, adjusted net earnings for 2017 was $68.0 million, or $1.38 adjusted diluted earnings per share, compared to $82.1 million, or $1.68 adjusted diluted earnings per share for 2016.
The effective tax rate for 2017 was (2.0)% compared to 35.6% for 2016. Excluding the impact of Tax Reform, the effective tax rate for 2017 would have been 31.8%, compared to 35.6% for 2016. The Company expects its effective tax rate will be between 24% and 26% in fiscal year 2018. The mix of pretax income and the varying effective tax rates in the countries and states in which we operate directly affects our consolidated effective tax rate.
Capital expenditures for 2017 totaled $40.6 million compared to $40.1 million in 2016. The Company paid dividends of $30.3 million, or $0.60 per share, and $29.2 million, or $0.60 per share, in 2017 and 2016, respectfully.
“We are very pleased with the strong support we received from our lenders as we amended and extended our credit facility in conjunction with the Muuto acquisition. In addition, Tax Reform legislation will have a positive impact on Knoll's cash flow as we anticipate a significant reduction in our effective tax rate. The additional cash flow will allow us to further invest in our business and strategic initiatives as well as reduce our outstanding debt,” noted Charles Rayfield, Senior Vice President and Chief Financial Officer.
Business Segment Results
The Company manages its business through its reporting segments: Office, Studio, and Coverings. All unallocated expenses are included within Corporate.
The Office segment includes a complete range of workplace products that address diverse workplace planning paradigms. These products include: systems furniture, seating, storage, tables, desks and KnollExtra® accessories as well as the international sales of our North American Office products.
The Studio segment includes KnollStudio®, HOLLY HUNT®, Knoll Europe and DatesWeiser. KnollStudio products, include iconic seating, lounge furniture, side, cafe and dining chairs as well as conference, training and dining and occasional tables. HOLLY HUNT® is known for high quality residential furniture, lighting, rugs, textiles and leathers. In addition, HOLLY HUNT® also includes Vladimir Kagan Design Group, a renowned collection of modern luxury furnishings. Knoll Europe, which distributes both KnollStudio and Knoll Office products, manufactures and sells products to customers primarily in Europe. DatesWeiser, known for its sophisticated meeting and conference tables and credenzas, sets a standard for design, quality and technology integration.
The Coverings segment includes KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. These businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products.
The tables below present the Company’s segment information with Corporate costs excluded from operating segment results.
